We like Inari’s capacity expansion which will fuel multi-years of growth. New products undergoing qualification could positively surprise. Reiterating our BUY and 12 month TP of RM2.80.

What’s New?

Inari completed the expansion of its P13 plant in May 2018, which will add an additional 120k sq ft of floor space (pushing its floor space capacity to 340k sq ft). It plans to consolidate its RF business at this new site from another location, which will result in some rental cost savings. Inari also commenced construction of its P34 plant in 1Q18, to be built over 4 phases. Phase 1 alone will provide 220k sq ft of production floor space.

Undergoing Qualification for New Business

Management is targeting 2 customers to fill the new capacity, with one being a new customer. At present, Inari is undergoing qualification for production of mini LEDs (targeting large scale production for electronic billboards in China) and a VCSEL recognition chip, which we understand will be for smartphone-related use. This, in our view, will reduce the slack from its IRIS IR-related business, which has softened.

RF Business Remains Stable

Demand for premium RF filters remains strong, despite the growth saturation in the global smartphone market. Driven by an increase in bands and the complexity of LTE coverage expansion, RF should remain robust, given that Inari’s customer Broadcom, is a major player in the RF segment.

New Business to Create Additional Earnings Drivers and Reduce Risk.

We forecast FY18 capex of up to RM160m, depending on the new business segments. We are positive on these new developments as it will help reduce single customer exposure to Broadcom (>70% of revenue) and creating new growth drivers for the group.

Maintain BUY and RM2.80 Target Price

We like Inari as it is well positioned to benefit from growth in the RF segment. Being one of the largest RF testing houses in the region, we believe Inari stands to benefit from 5G rollout, which should underpin better demand for premium RF filters. The new businesses undergoing qualification should they materialise, would provide additional earnings catalysts ahead. We reiterate our Buy (1) call and 12-month TP of RM2.80, based on 20x FY19E PER. Key risk: high single customer concentration and sharp appreciation of the RM against the USD.

Source: Affin Hwang Research - 28 Jun 2018